The age of Irish austerity will not be short-lived

ANALYSIS:The budget suggested the reasons for not cutting faster and deeper were political rather than economic

These are not good times for those of an optimistic disposition. At home, things have been grim for the best part of half a decade. In Europe, recession has returned and the euro’s foundations are still not built to last. In the US, politicians are putting recovery at risk as they fight over the federal budget.

The fighting in Government Buildings and around the Cabinet table in the run-up to Wednesday’s budget was far less intense than in Washington, and it was mostly for show. The Coalition partners met the budgetary targets they are obliged to meet under the terms of the State’s bailout, and they did so (again) by spreading the pain so as to minimise the risk of confrontation with any powerful grouping or those with vested interests.

Opportunity-in-crisis radicalism is not the way things are done here. Even the property tax, which is the most radical departure in the budget package, is designed to generate just €250 million next year. To put that in perspective, the cash raised from the tax will cover just one euro in every 280 the Government has committed to spending next year.

The salami-slicing approach to regaining control of the public finances has economic as well as political logic. Austerity dampens economic activity, and the more of it there is the less growth there will be, all other things being equal.

But the Government is trying to have it both ways. On the one hand it has rejected the suggestion of the independent budgetary watchdog – the Irish Fiscal Advisory Council – that it do more to reduce its deficit and debt. In making that rejection, Minister of Finance Michael Noonan said larger adjustments than planned would harm growth, with knock-on consequences for tax revenue.

On the other hand, Wednesday’s budget analysis shows the €3.5 billion package to be introduced in 2013 will have limited revenue-dampening effects. All this suggests the reason for not cutting deeper and faster in the hope recovery comes sooner was political rather than economic.

Large scope for cuts

Without in any way downplaying the difficulty cuts of any kind cause for those whose income diminishes because of them, the scope for cutting is large. What’s more, the narrative to explain a more radical route to State solvency is strong and straightforward when the full bubble-to-bust period is considered.

In 2002, the year the property bubble began to inflate, the State spent some €44 billion. Next year the Government has pencilled in spending of €70.4 billion.

Over this 11-year period – half of which was recessionary – the size of the State sector will have grown by 60 per cent. Among the countries in the euro zone during that time, only Luxembourg is expected to record a larger increase over the period, according to European Commission data and projections. The expansion in the size of the State also far exceeds that in Europe’s paymaster and politically most powerful state, Germany, where spending is projected to rise by just 28 per cent in the 11 years to 2013.

Had the Coalition wanted to be radical when it came to power it could have sought to bring total spending back to, say, €55 billion (the amount of revenue it expects to bring in this year). That was the level of spending in 2005. Selling mid-decade spending levels to the electorate would certainly not have been easy and cuts of that magnitude would have meant confronting interest groups, including the most powerful ones, but it could have been done. The narrative would have been strengthened by the promise of an end to austerity sooner than will happen under the existing plan.

Given the extreme fragility in Europe, a big negative shock may ultimately force the Coalition to go down the radical route, but it has clearly eschewed this (admittedly risky) option.

Instead, it is locked into two more years of austerity budgets – with cuts and tax increases of €3.1 billion in a year’s time and €2 billion in 2015. The hope is that from 2016 economic growth will do the heavy lifting of adjustment, gradually eroding the budget deficit and the mountain of public debt.

But this hope is vague, as illustrated by the absence of any Government projections for the economy or the budgetary position beyond 2015. That things may not turn out as planned was highlighted on Wednesday by the British government’s changed budgetary projections.

While Noonan and Brendan Howlin were spelling out the details of Budget 2013 in the Dáil, their counterpart in London was telling the UK public their austerity would go on until 2017.

If the hole the British are in is not nearly as deep as the one we are in, but they are preparing for more years of retrenchment, the chances of fiscally neutral budgets in 2016 are slim.

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